Become An Angel Investor

You will negotiate the amount of time given to due diligence with the entrepreneur, and it is recommended you take at least 30 days. Be extremely wary of equivocal reactions or noticeable resistance to due diligence, especially if it’s coming from the principals.

1- Technology How will the technology perform against the existing market? You want to see a perceptible demand for the product, how it has performed in a wide range of tests, and what separates it from the competition.

The technology should already be legally protected by patents. Take this element a step further and look into the employment background of the management; you want to eliminate the chance that they engineered any aspect of this technology while employed elsewhere.

Most importantly, ask yourself how well you understand this product as well as the field. Maintain high standards for yourself here: You should have a clear, deep understanding of as many aspects as possible. If this isn’t the case, consider having an outside party assess it. Otherwise, your wisest move may be to walk away from the venture altogether. 2- Human resources Begin by getting to know the management team as best you can — more than anyone else, and more than anything beyond your control, these people carry your investment. Look into their past achievements and survey their reputations among colleagues. Although reputations are not the be-all and end-all, you would like to know beforehand if, for instance, one of the principals is notorious for sliding from flop to flop while still landing capital.

3- Finance What is the true value of your investment? This is no time to try to convince yourself of an investment’s potential; ground yourself with unsentimental predictions and assumptions. Since financial statements can only take you so far, try to make that determination with one of three approaches: income, market or asset.

Income:By applying methods such as net present value, equity cash flow or adjusted cash flow, approximate how much removable cash flow the company could sustain without compromising its operations.

Market: Approximates the company’s value by measuring it against similar, but publicly traded, companies. This method is often used as a way to double-check results from the income approach.

Asset: Approximates its value as an applicable financial option (ie, a call or put). 4- Legal A quick way to evaluate the level of seriousness and professionalism among a venture’s principals is to inquire into whether or not they have their legal ducks in a row. Having all or much of the proper documentation in place, such as incorporation documents and a shareholders agreement, bodes well for your investment.